The People’s Bank of China cut key interest rates on loans issued by the state-owned banking system on Tuesday, a clear sign of growing concerns in the Chinese government and corporate sector that the country’s economy is stalling.
The rate cut was small, one-tenth of the one- and five-year rates on which the country’s loans are based. But the cuts could have some impact on the overall pace of economic growth, as nearly all domestic business and mortgage loans are pegged to the two rates.
The move by the central bank, the People’s Bank of China, puts China at odds with Western policy. The Fed has been battling inflation for more than a year before halting rate hikes earlier this month. The European Central Bank has also raised interest rates in response to inflation.
But China has the opposite problem. With spending and private sector investment so weak, businesses are racing to lower prices to keep customers. In fact, consumer and producer prices fell in the four months to May.
Han Shen Lin, former deputy director of China at Wells Fargo Bank and now a finance professor at New York University in Shanghai, said rate cuts were slow-acting medicine for the Chinese economy. Businesses typically negotiate borrowing limits with banks once a year and receive loans for periods ranging from weeks to months. Lower interest rates apply only when new loans are created or existing loans are rolled over.
Mr Lin said Tuesday’s rate cut by the People’s Bank of China “will seep through the system, but it will be gradual.”
Households will have to wait longer to reap the benefits. In China, mortgage interest rates are mostly adjustable. However, adjustments are often made in January, the People’s Bank of China said Tuesday in an explanatory statement accompanying the rate cut announcement.
So while homebuyers in the coming months may benefit from new tax cuts, many homeowners will have to wait longer.
Tuesday’s move marked China’s first cut in lending rates since August last year, when the economy was still struggling after a two-month coronavirus lockdown in Shanghai. The cuts send a message that the Chinese government wants to stabilize production at a time of declining exports, slowing construction and low consumer confidence. The government’s abrupt abandonment of its anti-coronavirus measures late last year sparked hopes that China’s economy would recover.
The modest scale of rate cuts suggests concerns among Chinese economic policymakers, but they are not panicking. In contrast, when the global financial crisis accelerated in late 2008, the People’s Bank of China lowered its benchmark lending and deposit rates by 1.08 percentage points in one day. Then, during the Asian financial crisis in the late 1990s, China cut lending rates by 1.44 percentage points in one day.
